1 PowerPoint Slides prepared by: Andreea CHIRITESCU Eastern Illinois University © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned,

1

PowerPoint Slides prepared by: Andreea CHIRITESCU

Eastern Illinois University

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

PowerPoint Slides prepared by: Andreea CHIRITESCU

Eastern Illinois University2

What is economics?

Why does public discussion of economic policy so often show the abysmal ignorance of the participants? Why do I so often want to cry at what public figures, the press, and television commentators say about economic affairs?

ROBERT M. SOLOW, WINNER OF THE1987 NOBEL PRIZE IN ECONOMICS


Ideas for Beyond the Final Exam

1. How much does it really cost?– Opportunity cost of a decision

• The value of the next best alternative that must be given up because of that decision

2. Attempts to repeal laws of supply & demand - Market strikes back

– Price ceilings

– Price floors

3© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.


3. Surprising principle: comparative advantage – Law of comparative advantage

4. Trade is a win-win situation– Voluntary trade – all parties gain

5. Importance of thinking at the margin– Marginal analysis

• Marginal costs• Marginal benefits



6. Externalities – a shortcoming of market cured by market methods – Externalities – social costs

• Affect parties external to the economic transactions that cause them

7. Trade-off between efficiency and equality



8. Government policies can limit economic fluctuations - but don’t always succeed – Fiscal policy

• Control over taxes and government spending

– Monetary policy• Control over money and interest rates



9. Short-run trade-off between inflation & unemployment – Low unemployment normally makes

inflation rise

– High unemployment normally makes inflation fall



10. Productivity growth is (almost) everything in the long run – Small increase in productivity growth

• Can have a huge effect on a country’s standard of living over a long period of time

– Slowdown in productivity growth that persists for a substantial number of years • Devastating effect on living standards


Inside the Economist’s Tool Kit

• Economics as a discipline– Mathematical reasoning

– Historical study

– Statistics

• Need for abstraction– Abstraction from unimportant details =

necessary to understand the functioning of anything as complex as the economy


Map 1Detailed Road Map of Los Angeles


Map 2Major Los Angeles Arteries and Freeways



• Abstraction– Ignoring many details so as to focus on

the most important elements of a problem

• Proper degree of abstraction– Depends on the objective of the analysis


Map 3Greater Los Angeles Freeways



• Theory– Deliberate simplification of reality

– Explain how relationships work

• Statistical correlation– Variables - go up or down together

– Need not imply causation



• Economic model– Simplification - aspect of economy

– Expressed• Equations• Graphs• Words

• Disagreements– Imperfect information

– Value judgments


Appendix Using graphs: a review

• Economic graphs– Large quantity of data - quickly

– Facilitate data interpretation & analysis

– At a glance• Important statistical relationships

• Variable– Measured by a number

– Analyze what happens to other things when the size of that number changes



• Two-variable diagrams– Horizontal axis

– Vertical axis

– Origin : The “0” point in the lower-left corner of a graph where the axes meet• Both variables are equal to zero

– Abstract

– Focus• Two variables of primary interest


Figure 1Hypothetical demand curve for natural gas: St. Louis

18

Quantity

20 40 60 80 100 120 1400

Pric

e

1

2

3

4

5

6

b

Q

P

(a)

Quantity

20 40 60 80 100 120 1400P

rice

1

2

3

4

5

6

Q

P

(b)

a

D

a

b


Table 1Quantities of natural gas demanded at various prices



• Slope of straight line– Ratio: vertical change “rise”

– To: horizontal change “run”

• Negative slope– One variable falls, other rises

• Positive slope– Both variables rise


Figure 2Different types of slope of a straight-line graph

21

(a)

Y

X0

(b)

Y

X0

(c)

Y

X0 (d)

Y

X0

Negative slope

Positive slope

Zero slopeInfinite

slope



• Zero slope– Y value doesn’t change

• Infinite slope– X value doesn’t change

• Slope of straight line– Same numerical value


Figure 3How to measure slope

23

(a)

Y

X0

(b)

Slope = 1/10

133

89

A

C

B

Y

X0

Slope = 3/10

133

8

11

A

C

B



• Slope of a curved line– Different numerical value

– At one point• Slope of tangent (straight line)


Figure 4Behavior of slopes in curved graphs

25

(a)

Y

X0

(b)

Y

X0

(c)

Y

X0 (d)

Y

X0

Negative slope Positive slope

Positive

slope

Negative

slope

Negative

slope Positive

slope


Figure 5How to measure slope at a point on a curved graph

26

E

X1 2 3 4 5 6 70 8 9 10

Y

1

2

3

4

5

6

7

8 r

rT

R

G

M

t

tB

F

A

C

D



• Y-intercept• X-intercept• Ray through origin

– Y-intercept = zero

• 45° lines– Rays through origin

– Slope = 1

– Angle = 45° with the horizontal axis

– X=Y27© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as

permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Figure 6Rays through the origin

28

X1 2 30 4 5

Y

1

2

3

4

5

A

B

K

E

D

CSlope = +1

Slope = +1/2

Slope = +2



• Contour map (topographical map) – Three pieces of data

• Latitude• Longitude• Altitude


Figure 7A geographic contour map



• Production indifference map– Axes - quantities of two inputs used to

produce some output

– Curve - given quantity of output• Points on curve = different quantities of two

inputs just enough to produce the given output


Figure 8An economic contour map

32

Labor hours per day

10 20 30 40 50 60 700 80X

Y

10

20

30

40

50

60

70

80

Yar

ds o

f cl

oth

per

day

Z = 10

Z = 20

Z = 40

Z = 30

A

B


Documents

1 PowerPoint Slides prepared by: Andreea CHIRITESCU Eastern Illinois University © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned,